When to Consult the Charts

One of the most important parts of investing is separating fact from fiction, Cramer said Monday, because the market is full of false leads that could hurt your portfolio. You have to filter out the misinformation and find an accurate picture of exactly what’s happening at any given time.

Well, that is what tonight’s show was all about. Cramer drew on his over 30 years of Wall Street experience to teach viewers how to dig deep for the truth. And the truth isn’t always easy to find, not in an environment where negativity rules and the media give preference to doom-and-gloom prognosticators. But Cramer offered a few rules for fact finding that should help put the hype into perspective.

The first? Consult the charts. Cramer himself is a stock fundamentalist, meaning he values a company based on the strength of its business and its prospects going forward. Technical analysts, however, look for patterns in the charts to predict where stocks will go in the future. While Cramer would never endorse relying solely on the charts, he said that they do provide one key insight that you don’t want to miss: They tell you how the institutional investors are trading a stock.

This is important because there are times when the big money drives share prices more than the fundamentals. So you always want to keep an eye on what the institutions are doing. Are they done buying? Have they started selling? The charts should tell you, and they can help you call the next big move. Sometimes they even provide advance warning of coming news that no one else knows about yet.

Cramer said the charts predicted an upside surprise followed by a major rally in Big Lots , and it called the bottom in Bank of America , which tripled in value less than three months later. Technical analysis even worked in nailing the market’s generational bottom in early March 2009.

Here’s how you might want to combine the charts and fundamentals to your advantage: Because institutional investors buy and sell immense amounts of stock, they have the power to affect share prices in the short term. So use the charts to figure out what they’re doing.

At the same time, the fundamentals tell you if a stock is worth owning and at what price. And it’s these factors that drive the stock’s trajectory over the long term. By taking into account both of these kinds of analysis, you get a more complete idea of how to approach your investment.